Is There A Start-Up Funding Freeze?

It sure looks like it, and the IPO market is to blame

The IPO market is critical to the U.S. economy: It’s both a way for companies to raise huge amounts of money and a way for early-stage investors to get outsized returns for taking big risks.

Unfortunately, things have been pretty tough lately, especially for Internet and social deals. Just look at the plunges in valuation for companies like Facebook (NASDAQ:FB), Groupon (NASDAQ:GRPN) and Zynga (NASDAQ:ZNGA).

So in light of this, are we starting to see a negative impact on web start-up funding? Well, according to a piece in The Wall Street Journal, it looks like the answer is yes.

Angel investors and venture capitalists (VCs) are apparently starting to focus much more on business models and the sustainability of new ventures. And because of this, the general trend is towards lower valuation as well as longer funding cycles.

Really, though, this is good news. Let’s face it: The IPO market is about creating true economic value, not just allowing for the availability of cool technologies.

In fact, this is why other tech sectors have fared much better, such as cloud computing and security technologies. Companies like ServiceNow (NYSE:NOW), Palo Alto Networks (NYSE:PANW) and Splunk (NASDAQ:SPLK) have pulled off highly successful IPOs. Plus, these companies are growing at torrid rates and also have solid revenue streams.

As a result, capital will start to flow into these sectors and away from others like social and Internet categories — precisely why the capitalist system is so effective.

And, of course, so brutal for young entrepreneurs — especially those who think that bubbles can somehow last forever.

Based in Silicon Valley, Tom Taulli is in the heart of IPO land. On a regular basis, he talks with many of the top tech CEOs and founders trying to find the next hot deals and finding out which start-ups are stinkers.

A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.

Tom is routinely quoted in the media about upcoming deals with his interviews on CNBC and Bloomberg TV, but he is eager to take your questions too. You can message him on Twitter at @ttaulli. And feel free to weigh in via the comments section on any of his IPO Playbook posts.